Zynga surges after buying NaturalMotion

Reuters.Zynga chief executive Mark Pincus speaks during an event at the company's headquarters in San Francisco, California in this file picture.

San Francisco - Zynga Inc. soared the most since its initial public offering after saying it will cut 15 percent of its staff and buy a popular mobile developer for $527 million.

The stock jumped 17 percent to $4.18 at 10:01 a.m. in New York, after rising as much as 26 percent, the biggest intraday gain since the company’s IPO in December 2011 at $10 a share.

Zynga, known for its “FarmVille” and casino-style games, is firing about 314 people, mostly at its San Francisco headquarters, according to a statement yesterday.

The company agreed to buy UK-based NaturalMotion Ltd. for $391 million in cash and 39.8 million shares of Zynga, valued at $136 million based on the Jan. 29 closing price.

Chief executive Don Mattrick, who left Microsoft Corp. to take over at Zynga in July, is retooling the company to focus on games for smartphones and tablets.

The acquisition adds two popular mobile titles, “CSR Racing” and “Clumsy Ninja” to the three segments Mattrick has targeted for growth: Zynga’s “Ville” games, virtual gambling and puzzle games.

“The core business is regaining some of its swagger,” Mattrick said in an interview.

“What we have now is the right base to build upon. We’ve got five key brands, and five key areas we know consumers care about.”

Under founder and former chief executive Mark Pincus, Zynga missed a consumer shift away from titles played on Facebook Inc. to apps on mobile devices.

“FarmVille” will debut on mobile devices by June, and three-fourths of new titles this year will appear first on handhelds, Mattrick said.

Virtual Goods

Zynga, which had been scheduled to report fourth-quarter results on February 6, posted improved results for its popular “Words with Friends” and “Zynga Plus Casino” games.

“Zynga Poker,” registered sequential revenue growth for the first time in 18 months.

“Mattrick is saying and doing all the right things,” said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who recommends the stock.

“They needed to beef up their mobile capability and this acquisition does so. He’s telling the street he’s committed to fixing Zynga.”

Bookings, the value of virtual goods sold in the quarter, totalled $146.7 million, beating the $138 million estimate of Michael Olson, an analyst with Piper Jaffray Cos. in Minneapolis who has a neutral rating on the stock.

“Mobile monetisation is improving each quarter,” Olson wrote in a Jan. 29 note.

Mattrick “may have the leadership skills and enough support from key investors to turn the company around.”

Average Users

Zynga’s average monthly mobile users totalled 1.3 million at year end, down from 1.6 million three months earlier.

“CSR Racing” and “Clumsy Ninja” rank this month among the 50 highest-grossing mobile games on Apple Inc.’s iOS platform, according to AppData.

NaturalMotion, based in Oxford, England, has 260 employees, including some in San Francisco.

It also develops special effects for movies and console games, and will continue to publish under its own brand.

The purchase of NaturalMotion, which had total 2013 bookings of about $62 million, will add 1 cent a share to earnings this year, contributing about $15 million to $25 million in adjusted earnings before interest, taxes, depreciation and amortisation, Zynga said.

Of the shares being paid in the deal, 11.6 million are subject to vesting conditions for executives, including NaturalMotion co-founder Torsten Reil, Zynga said.

Tremendous Growth

“We see 2014 as a year of growth,” Mattrick said.

“The company has been through a lot, some of that a byproduct of the tremendous growth the company achieved. Now we’ve slowed down, simplified our structure and applied renewed rigor.”

The net loss for the fourth quarter narrowed to $25.2 million, or 3 cents a share, from a loss of $48.6 million, or 6 cents a year earlier, Zynga said.

Analysts expected a loss of 4 cents, the average of 22 estimates compiled by Bloomberg.

The company’s reported revenue included virtual items sold before the quarter and amortised over their expected life.

For the current quarter, Zynga forecasts sales of $155 million to $165 million, compared with analysts’ estimates of $164.2 million.

The company sees net a loss of 6 cents to 7 cents a share, including restructuring costs of $15 million to $17 million related to the job cuts.

Analysts were predicting a loss of 1 cent, before yesterday’s announcement.

Bookings are estimated at $138 million to $148 million, Zynga said.

Zynga last year cut at least 520 jobs, closed offices and said it would look for other areas to streamline the organisation as Mattrick focuses development teams on his growth objectives. - Bloomberg News

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